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JPMorgan Chase: Corporate Rap Sheet

JPMorgan Chase

By Philip Mattera

JPMorgan Chase, a prime symbol of financial sector misconduct and reckless behavior in recent years, represents the consolidation of several of the most powerful New York and Chicago money center banks as well as the investment house founded by the legendary financier and robber baron J.P. Morgan. In 2008 two failing institutions—brokerage house Bear Stearns and mortgage lender Washington Mutual—were added to the mix. Those two acquisitions played a key role in the $13 billion settlement JPMorgan reached with the U.S. Justice Department in 2013 to resolve allegations of abuses in the period leading up to the financial crisis. In 2015 it pleaded guilty to a criminal charge of currency market manipulation but was allowed to continue business as usual.

Beginning with Burr

The Chase part of the name came from Chase Manhattan, which had its origins in a company formed by Aaron Burr in 1799 both to supply water to New York to fight a yellow fever epidemic and to quietly enter the banking business. The water operation was soon sold off, but the Bank of Manhattan thrived for 150 years before merging in 1955 with Chase National Bank, which had been formed in the 1870s and became a powerhouse after it merged with John D. Rockefeller’s Equitable Trust in 1930.

The Rockefeller influence over the newly created Chase Manhattan was seen in the fact that 40-year-old David Rockefeller, grandson of John D., was named executive vice president and put on track to assume the leadership of the bank, which occurred in 1969. Rockefeller showed more interest in being an international power broker than in the mundane matters of running what had become the country’s largest bank. Sometimes the results were disastrous. For example, after the Shah of Iran, a major Chase customer, was deposed in 1979, Rockefeller and Chase advisor Henry Kissinger persuaded the Carter Administration to allow him to come to the United States—a step that helped prompt the seizure of hostages at the U.S. Embassy in Tehran.

In the 1980s Chase suffered significant losses resulting from its ties to the failed Penn Square Bank and Drysdale Government Securities. Chase also had heavy exposure to non-performing third world debt and commercial real estate loans. Eventually, the weakened Chase merged with its New York rival Chemical Bank in 1996. Chemical, whose origins went back to the early 19th Century, had grown through a long series of acquisitions in the New York area, and when interstate banking began to emerge in the 1980s it took over Texas Commerce Bankshares. Facing problems similar to those being felt by Chase, Chemical joined forces in 1991 with another leading New York bank, Manufacturers Hanover Trust, in what was then the biggest bank merger in U.S. history.

The new Chase Manhattan that emerged from the Chase-Chemical merger felt pressure to grow even larger and to join the movement by banks into the realm of securities. In 1999 Chase purchased the investment bank Hambrecht & Quist, but the following year saw the announcement of a much more momentous deal: the acquisition of J.P. Morgan & Co.

The Marriage of Morgan and Rockefeller

The famous House of Morgan had played a key role in creating mega-corporations such as General Electric and U.S. Steel that came to dominate U.S. business in the late 19th Century. The system of interlocking directorships built by Morgan to control dozens of those companies was a key reason for the passage of the Clayton Antitrust Act of 1914. J.P. Morgan died in 1913, but his firm’s aggressive business practices were carried on under the leadership of his son. The Glass-Steagall Act of 1933, which sought to control the excesses of the financial sector by mandating the separation of commercial banking and investment banking, forced Morgan to spin off its investment banking operations as Morgan Stanley. Morgan later merged with Guaranty Trust to form the money center bank Morgan Guaranty Trust, which in 1969 was put under a bank holding company called J.P. Morgan & Co.

During the 1980s J.P. Morgan pressured federal regulators for permission to move into the securities business and even considered giving up its commercial banking charter to make it easier to do so. As this process played out, J.P. Morgan found it could not escape the trend toward consolidation and thus succumbed to a $36 billion takeover by Chase Manhattan.

The new J.P. Morgan Chase that came into being in January 2001 had assets of some $700 billion, ranking it behind only Citigroup and Bank of America among the U.S. financial leaders. Before the deal closed, Chase Manhattan agreed to pay at least $22 million to settle lawsuits asserting that its credit card customers were charged illegitimate late fees. And after the deal was completed, Chase racked up hefty losses primarily related to the bankruptcies of Enron and various telecoms (especially Global Crossing) as well as the debt crisis in Argentina. A Business Weekstory in April 2002 about the CEO of Chase was headlined: “The Besieged Banker: Bill Harrison Must Prove J.P. Morgan Chase Wasn’t a Star-Crossed Merger.”

Enron was not just a financial problem for Chase; it was also a legal one. The bank was hit with a shareholder class action lawsuit charging it with failing to disclose the risks it was facing from Enron exposure (the case was later dismissed). It had to file its own lawsuit against a group of insurance companies when they refused to honor $1 billion in surety bond claims Chase had filed in connection with energy trading deals called prepays it had with Enron (the insurers later settled for 60 percent on the dollar). Those controversial deals were also the subject of a Senate investigation of whether Chase and Citigroup had helped Enron carry out its accounting fraud. In 2003 the Securities and Exchange Commission (SEC) announced that Chase would pay $135 million to settle charges relating to its role in helping Enron manipulate its financial statements. And in 2005 Chase agreed to pay $2.2 billion to settle a suit brought by Enron investors who claimed the bank participated in the energy trading firm’s accounting fraud. That same year, Chase agreed to pay $2 billion to settle a suit related to its role in underwriting bonds for a company, WorldCom, at the center of another accounting scandal.

In 2003, Chase’s securities arm was part of a $1.4 billion settlement by ten firms with federal, state and industry regulators concerning alleged conflicts of interest between their research and investment banking activities. Its share was $80 million.

The Bank One Takeover

Meanwhile, Chase continued to respond to imperative to grow. In January 2004 it announced a $58 billion deal to acquire struggling Chicago-based Bank One with its large retail banking and credit card operations. Bank One was the product of a 1998 merger of Banc One and First Chicago NBD. After the deal was completed, Chase modified its parent company name slightly to JPMorgan Chase & Co., with the JPMorgan name used for commercial banking and Chase for its greatly expanded retail banking operations.

During these years JPMorgan’s securities business was hit by a series of fines by industry regulator NASD (now FINRA), including: $150,000 in 2005 for sales of restricted securities in violation of lock-up agreements; $160,000 that same year for late and/or inaccurate reporting of municipal securities transactions; and $500,000 in 2007 for failing to disclosure the use of consultants in seeking municipal securities business. In 2006 JPMorgan agreed to pay $425 million to settle a lawsuit charging that its securities operation misled investors during the dot com boom of the 1990s.

JPMorgan’s next big mergers came in 2008, but they were not ones that the company sought. In March of that year, as the financial meltdown was beginning to occur, federal regulators prevailed on it to take over the collapsing investment house Bear Stearns. JPMorgan initially bid just $236 million for a firm whose stock market value the year before had been $20 billion. The Federal Reserve agreed to cover $30 billion of potential Bear Stearns losses. Fierce opposition to the fire sale price from Bear Stearns shareholders and employees forced JPMorgan CEO Jamie Dimon to boost the offer to $1.2 billion.

Bear Stearns brought with it a checkered history. In 1999 it had to pay $38.5 million to settle civil fraud charges brought by the SEC and the Manhattan District Attorney concerning its role in the failure of the brokerage firm A.R. Baron. Soon after the JPMorgan takeover, two Bear Stearns hedge fund managers were arrested and charged with fraud in connection with the collapse of two funds heavily invested in subprime mortgage-backed securities. (They were later acquitted of criminal charges but settled an SEC civil case.) Bear Stearns was also involved in the 2003 global conflict of interest settlement, paying $80 million of the total.

Taking on WaMu

Federal regulators returned to JPMorgan in September 2008 amid the collapse of mortgage lender Washington Mutual, the largest bank failure in U.S. history. To avoid having to make a huge payout out of the federal deposit insurance fund, the Federal Deposit Insurance Corporation (FDIC) arranged for JPMorgan to purchase WaMu for $1.9 billion. In the early 2000s, WaMu had embarked on an all-out effort to dominate the home mortgage business but took a big hit when interest rates rose sharply. It also faced a wave of lawsuits over sloppy loan servicing and excessive and erroneous fees.

JPMorgan, which also got a $25 billion infusion from the Troubled Assets Relief Program (TARP), did not receive immunity from legal and regulatory problems. In September 2009 it was fined $300,000 by the U.S. Commodity Futures Trading Commission (CFTC) for violating rules relating to the segregation of customer funds. In November 2009 the SEC announced that J.P. Morgan Securities would pay a penalty of $25 million, make a payment of $75 million to Jefferson County, Alabama and forfeit more than $647 million in claimed termination fees to settle charges that the firm and two of its former managing directors engaged in an illegal payment scheme to win business from the county involving municipal bond offerings and swap agreements.

In May 2010 the FDIC announced that Washington Mutual and JPMorgan had agreed to settle claims relating to the bank’s failure. The agency did not cite the size of the settlement, but it was later reported to be about $6 billion. The following year, WaMu agreed to pay $105 million to settle an investor lawsuit relating to its collapse. Three former WaMu executives later agreed to pay $64 million to settle with the FDIC, but most of the money was to be paid from insurance policies the bank had purchased for them.

In June 2010 JPMorgan Securities was fined a record £33.32 million by Britain's Financial Services Authority for failing to protect client funds by segregating them appropriately from firm funds.

In 2011 JPMorgan found itself at the center of a controversy over improper foreclosures and excessive interest rates in connection with home loan customers who were members of the military. The bank agreed to pay $56 million to settle charges of having violated the Servicemembers Civil Relief Act.

In June 2011 the SEC announced that JPMorgan would pay $153.6 million to settle allegations that in 2007 it misled investors in a complex mortgage securities transaction. The following month, the SEC said that J.P. Morgan Securities would pay $51.2 million to settle charges of fraudulently rigging municipal bond reinvestment transactions in 31 states. The agreement was part of a $228 million settlement the firm reached with a group of federal regulators and state attorneys general.

Documents made public in early 2011 in a lawsuit against JPMorgan by a court-appointed trustee in the Bernard Madoff Ponzi scheme case suggested that senior executives of the bank had developed doubts about the legitimacy of Madoff’s investment activities but continued to do business with him. The lawsuit was later dismissed.

In September 2011 the Federal Housing Finance Agency sued JPMorgan and other firms for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac. JPMorgan was one of five large mortgage servicers that in February 2012 consented to a $25 billion settlement with the federal government and state attorneys general to resolve allegations of loan servicing and foreclosure abuses. In March 2012 the CFTC announced that J.P. Morgan Securities would pay a $140,000 penalty to settle charges that one of its employees was involved in what was technically a fictitious sale of U.S. Treasury Note futures. The following month, the CFTC imposed a penalty of $20 million on JPMorgan for failing to segregate customer accounts being handled on behalf of Lehman Brothers prior to that firm’s collapse. And the CFTC later fined JPMorgan $600,000 for exceeding speculative position limits in cotton futures contracts.

In the Wake of the London Whale

After JPMorgan reported a $2 billion trading loss in May 2012, shareholders protested and the FBI opened an investigation of the matter. It later came out that top management at the bank had been alerted about the risky practices of a group of London-based traders (led by an individual know as the London Whale) who had caused the loss, which later grew to more than $6 billion. While critics of aggressive bank trading activities cited the loss as a reason for tighter regulation, JPMorgan’s Jamie Dimon appeared before the Senate Banking Committee to offer a perfunctory apology but mainly to defend himself and the bank.

In July 2012 JPMorgan agreed to pay $100 million to settle a class action lawsuit charging it with improperly increasing the minimum monthly payments charged to credit card customers.

In October 2012 New York State Attorney General Eric Schneiderman, acting on behalf of the U.S. Justice Department’s federal mortgage task force, sued JPMorgan, alleging that its Bear Stearns unit had fraudulently misled investors in the sale of residential mortgage-backed securities. The following month, the SEC announced that JPMorgan would pay $296.9 million to settle similar charges.

In December 2012 FINRA fined JPMorgan $465,700 for using fees from municipal bond offering to pay for lobbying activities. In January 2013 JPMorgan was one of ten major lenders that agreed to pay a total of $8.5 billion to resolve charges relating to foreclosure abuses. That same month, bank regulators ordered JPMorgan to take corrective action to address risk management shortcoming that had caused the massive trading losses. It was also ordered to strengthen its efforts to prevent money laundering. In a move that was interpreted as a signal to regulators, JPMorgan’s board of directors cut the compensation of CEO Jamie Dimon by 50 percent.

JPMorgan’s image was further tarnished by an internal probe of the big trading losses that found widespread failures in the bank’s risk management system. Investigations of the losses by the FBI and other federal agencies continue.

In February 2013 documents came to light indicating JPMorgan had altered the results of an outside analysis showing deficiencies in thousands of home mortgages that the bank had bundled into securities that turned out to be toxic.

In March 2013 the Senate Permanent Committee on Investigation released a 300-page report that charged the bank with ignoring internal controls and misleading regulators and shareholders about the scope of losses associated with the London whale trading fiasco. The committee also held a hearing in which JPMorgan executives were subjected to hours of intense questioning by both Democratic and Republican senators.

Later that month, the New York Timesreported that the bank was facing investigations by at least eight federal agencies.

In May 2013 the Timesrevealed a new investigation of JPMorgan by the Federal Energy Regulatory Commission, which was said to have assembled evidence that the bank used “manipulative schemes” to transform money-losing power plants into “powerful profit centers.”

That same month, the Attorney General of California filed suit against JPMorgan, charging it with engaging in “fraudulent and unlawful debt-collection practices” against tens of thousands of its credit card customers in the state. The bank was accused of violating proper legal procedure while filing vast numbers of lawsuits against those customers.

In July 2013 Federal Energy Regulatory Commission announced that JPMorgan Chase would pay $410 million in penalties and disgorgement to ratepayers to settle charges that it manipulated electricity markets in California and the Midwest.

In August 2013 JPMorgan acknowledged that it faced criminal and civil investigations of its sale of mortgage-backed securities in the period leading up to the 2008 financial meltdown. That same month criminal charges were brought against two former traders at the bank for covering up the London whale debacle. And there were reports that JPMorgan was the subject of a bribery investigation in connection with the hiring of children of powerful officials in China.

JPMorgan's legal costs mounted in September 2013. First, it and Assurant Inc. had to pay $300 million to settle accusations that they forced homeowners into purchasing overpriced property insurance. A week later, the Consumer Financial Protection Board announced that the company would pay $80 million in fines and refund an estimated $309 million to more than 2 million customers for illegal credit card fees.

That same day, U.S. and UK financial regulators announced that JPMorgan would pay a total of $920 million to settle charges relating to the London Whale case, with the bank admitting that it had violated securities laws.

In October 2013 the Commodity Futures Trading Commission announced that JPMorgan would pay $100 million to settle charges that it violated the Dodd-Frank Act's prohibitions against manipulative conduct in the trading of certain credit default swaps.

In November 2013 JPMorgan agreed to pay $4.5 billion to settle claims by a group of institutional investors that the bank had sold them faulty mortgage-backed securities between 2005 and 2008.

Later that month, the Justice Department announced that JPMorgan had agreed to a record $13 billion global settlement of federal and state claims relating to the sale of mortgage-backed securities by the bank itself as well as Bear Stearns and Washington Mutual. Of the total, $4 billion would take the form of relief to homeowners.

In December 2013 JPMorgan was fined $108 million by the European Commission for its role in the illegal manipulation of the LIBOR interest rate index by major U.S. and European banks.

In January 2014 federal prosecutors announced that JPMorgan would pay $1.7 billion to Madoff victims in order to settle civil and criminal charges that it failed to alert authorities about large numbers of suspicious transactions made by Madoff while it was his banker. In a separate but related action, the Office of the Comptroller of the Currency fined JPMorgan $350 million for deficiences in its anti-money-laudering controls.

The company surprised and angered many observers, when, in the wake of these billions in settlements, it announced that Dimon would be getting a raise.

In November 2014 JPMorgan was fined $310 million by the U.S Commodity Futures Trading Commission and $352 million by Britain's Financial Conduct Authority as part of a settlement of charges that it and other major banks manipulated the foreign exchange market.

In December 2014 FINRA fined JP Morgan Securities $5 million as part of a case against ten investment banks for allowing their stock analysts to solicit business and offer favorable research coverage in connection with a planned initial public offering of Toys R Us in 2010.

In March 2015 the Justice Department announced that JPMorgan would pay $50 million to settle allegations that it had improperly submitted "robo-signed" documents to bankruptcy courts around the country in connection with cases involving more than 25,000 homeowners.

Two month later, the Justice Department announced that JPMorgan was one of a group of banks pleading guilty to criminal charges of conspiring to fix foreign currency rates. JPMorgan was fined $550 million (and another $342 million by the Federal Reserve) and put on probation for three years. The SEC gave it a waiver from a rule that would have barred it from remaining in the securities business.

In July 2015 the Consumer Financial Protection Bureau announced that JPMorgan would pay $136 million to the agency and to 47 states, along with $50 million in customer refunds, to settle allegations that it used illegal tactics to pursue delinquent credit card debt; another $30 million was to be paid to the Office of the Comptroller of the Currency.

In December 2015 the SEC fined JPMorgan $267 million to settle charges that two of its wealth management subsidiaries improperly steered clients to in-house investment products (the Commodity Futures Trading Commission added another $40 million to the penalty).

In November 2016 a subsidiary of JPMorgan reached settlements with the Justice Department (for $72 million), the SEC ($130 million) and the Federal Reserve ($61.9 million) in a case involving the hiring of children of Chinese officials to win business.

In January 2017 JPMorgan agreed to pay $53 million to settle federal allegations that it charged African-American and Hispanic mortgage borrowers higher rates than white customers,